Budget variance analysis is an essential final step of any budgeting process and a necessary prerequisite to the next budgeting cycle. Finally, you want to compare your actual expenses to your budget and what is a flexible budget evaluate how effective and accurate your flexible budget was. Flexible budget variance is the difference in spending or revenue between the base or original budget and the budget that was flexed into.

SaaS businesses typically work with costs like hosting fees and site development, so when website traffic starts to increase, so do those hosting costs. They increase the cost of the product to account for this variance and make 50 of their 100 product sales during this reporting period at this new price. Their flexible budget variance for this product, therefore, is -$250 (50 units sold with $5 more COGS than budgeted, or -$5). In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that are directly tied to actual revenue incurred.

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A flexible budget is a budget that can be adjusted for changes in business activity like sales or production volume. Typically, these adjustments are predetermined so as to avoid scalability challenges, like taking on more clients than the company can reasonably handle. Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized. Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures.

Robin W. Haire, AIF, highlights the usefulness of budgeting apps in the case of retirees. “Financial planning software is crucial to show retiree clients how taking lump sum withdrawals can cause them to run out of money before they run out of time —this can be an eye opener,” Haire says. You can set up automatic transfers to your savings accounts or investment funds to ensure that the pay-yourself-first principle is consistently applied, making saving a seamless part of your financial management.

What is a flexible budget?

The key is consistently monitoring your spending patterns to identify areas where you can cut back or reallocate funds. Priority-based budgeting ranks expenses according to their importance and allocates funds based on these priorities. This method allows for flexibility in budgeting and adapting to changing financial circumstances and priorities. It analyses the costs with respect to the variations in the output levels. Consequently, the categorization of cost takes place under Fixed, Variable and Semi-variable.